Suppose that the index model for stocks A and B is estimated from excess returns with the following results:
RA = 1.6% + 0.70RM + eA
RB = -1.8% + 0.9RM + eB
sM = 22%; R-squareA = 0.20; R-squareB = 0.15
Assume you create portfolio P with investment proportions of 0.70 in A and 0.30 in B.
1. What is the firm-specific variance of your portfolio? (Do not round your intermediate calculations.Round your answer to 4 decimal places.)
Firm-specific
2.What is the covariance between the portfolio and the market index? (Do not round your intermediate calculations. Round your answer to 3 decimal places.)
Covariance